Why tax havens must go!

23 August 2016
by
Third World Network

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Tax havens are drivers of global corruption and hurt developing countries the most. And as more than 300 leading economists from 30 countries affirmed in a letter to the London anti-corruption summit (see text below), they serve ’no useful economic purpose’.

As tax revenues from MNCs and wealthy individuals fall short, governments are left with two options: either to cut back on essential spending needed to reduce inequality and poverty, or to make up the shortfall by levying higher taxes on other, less wealthy sections of society and smaller businesses in the domestic economy. Both options see those at the bottom lose out and the inequality gap grow.

Tax revenue is essential to fund vital public services such as education, health and infrastructure, as well as cash transfers such as child benefit and state pensions. Universal, free public services are proven to tackle inequality and poverty. Ending the era of tax havens will ensure that the necessary funds for these services can be raised in a more redistributive fashion - in particular, through direct taxation of income, profits, wealth and capital gains, rather than through consumption taxes such as VAT that are likely to be more regressive and can lead to the poor subsidising the rich.

The most easily quantifiable cost of tax haven secrecy is the scale of revenues lost around the world due to tax not being paid. There is no doubt that this has a huge impact on development potential, despite the inevitable uncertainty about estimates of the sums involved and the need for better data. Global estimates of individual and corporate wealth held ’offshore’ span a wide range.

The highest estimate of individual wealth hidden away in ’secrecy jurisdictions’ suggests a range of $21-32 trillion, based on triangulation of multiple methods (and data sources).

Tax haven secrecy also undermines good governance - and prevents policy makers from resisting capture by self-interested elites. Tax rules are just a subset of the wider laws and regulations that are undermined by the ability of the wealthy to hold assets anonymously.

Corruption is commonly understood as ’the abuse of power for private gain’. When individuals and organisations seek to use their power to avoid paying the taxes they owe by utilising preferential facilities such as tax havens, which provide them with undue tax-free rewards, this is a form of corruption.

Organisations including Global Witness and Transparency International have led the way in highlighting just how pervasive anonymous ownership is, not least in the London property market. Global Witness recently reported that substantial parts of the city’s famous Baker Street are owned by a mysterious figure with close ties to a former Kazakh secret police chief accused of murder and money laundering. Transparency International’s analysis shows that 36,342 London properties covering a total of 2.25 square miles are held by anonymous companies. Using police data, it also showed that 75% of properties whose owners are under investigation for corruption made use of offshore corporate secrecy to hide their identities. A recent Channel 4 television documentary, From Russia with Cash, revealed the apparent willingness of London estate agents to facilitate corrupt purchases. Deutsche Bank analysis suggests that Russian money constitutes a major part of the roughly œ1 billion a month of hidden capital inflows to the UK.

president Jim Yong Kim has labelled it explicitly as ’a form of corruption that hurts the poor’.

Overall, tax havens undermine not only tax systems but also the wider effectiveness of states. The Norwegian Government Commission on Capital Flight Out of Developing Countries made the case powerfully: ’Potentially the most serious consequences of tax havens are that they can contribute to weakening the quality of institutions and the political system in developing countries. This is because tax havens encourage the self-interest that politicians and bureaucrats in such countries have in weakening these institutions.’

Tax havens: drivers of economic crashes

Last but far from least, tax haven secrecy has a significant impact on the ability of financial regulators to identify and mitigate risk in capital markets. This was an important contributory factor to the global financial crisis that began in 2007 and continues to cast a long shadow. Given the growing economic inequality we have witnessed in the aftermath of the financial crisis, the role that tax havens played in creating the conditions for it is doubly important. We need to tackle tax havens in order to challenge the causes and symptoms of the financial crash.

The deliberate and systematic exploitation of financial secrecy to circumvent capital market regulation provided the basis for higher profits in the short term - largely enjoyed by a wealthy few - and at length a global crisis for the many. The crimes that tax haven secrecy enables give rise, therefore, to greater economic inequality and to less well-functioning and competitive markets, and to greater political inequality through the corruption of systems of democratic representation. Tax havens are corrupting global markets.

Tax havens hurt developing countries the most

It’s estimated that poor countries lose out on a staggering $170 billion of taxes every year because of tax havens - vital revenue that is desperately needed to pay for public services like healthcare and education.

Individual studies can give a powerful indication of the scale of impacts. An ActionAid case study found that Australian mining company Paladin had cut $43 million from its tax bill in Malawi. This could have paid for either: 431,000 HIV/AIDS treatments, 17,000 nurses, 8,500 doctors or 39,000 teachers.

http://www.oecd.org/about/membersandpartners/ countries and 1.3% for developing countries. However, the GDP comparison does not show the full difference in intensity of losses, because developing countries have lower tax revenues in general: often 10-20% of GDP, rather than 30% or more in OECD countries. The proportion of revenues foregone is therefore substantially greater in comparison: perhaps 6-13% of existing tax revenues in developing countries, as opposed to just 2-3% in OECD countries.

Estimates of undeclared individual wealth also suggest a particular intensity in developing countries. One estimate is broken down by region; see Table 1. With the exception of Russia and the Gulf countries, the proportion of wealth held offshore is largest for Africa and Latin America - more than twice that of Europe and many times higher than that of the US. While it is difficult immediately to construct an equivalent share of current revenues, the estimated revenue losses for Africa and Latin America appear disproportionate to their shares of world GDP. Oxfam calculates that the $14 billion a year that African countries lose to individuals hiding their wealth offshore would be enough to pay for healthcare that could save the lives of four million children and employ enough teachers to get every African child into school.

Supporting this finding for Africa, there are also regional estimates of lost capital that strongly imply that the region is a net creditor to, rather than a net debtor of, the rest of the world. Former African Development Bank chief economist Léonce Ndikumana and co-author James Boyce have produced a series of estimates of the stock of African capital flight offshore since the 1970s, most recently for a new volume produced by the African Economic Research Consortium. They estimate that the stock of flight capital built up between 1970 and 2010 for 39 African countries and held offshore is approximately $1.3 trillion, or 82% of the 2010 GDP of these countries. In contrast, the stock of external debt stood at $283 billion - so the scale of African wealth hidden offshore is estimated to exceed recorded external debt by a ratio of more than four to one.

Finally, a narrower study, but with global coverage, provides additional supporting evidence for the view that developing countries in general suffer a greater intensity of tax haven exposure. The ’Swiss Leaks’ data, leaked in 2008 by whistleblower Herve Falciani, revealed the pattern of foreign holdings in the bank accounts operated by HSBC Switzerland.

The data provide only a snapshot, and cannot be extrapolated with any confidence due to the continuing lack of consistent data on international banking. Nonetheless, they provide a unique insight into the business model of a major global bank operating in the jurisdiction which is consistently shown to be the biggest global tax haven.

For some countries, such as Kenya, Egypt and Burundi, HSBC held assets worth more than 1% of GDP. African countries both north and south of the Sahara are consistently the most exposed to corporate tax dodging in terms of proportion to GDP/tax revenues. This is exacerbated by economist Gabriel Zucman’s startling estimate that 30% of African wealth held by individuals is held offshore in a narrow range of financial assets. A number of countries in both Latin America and South Asia also show significant exposure.

Few countries have as little exposure, in proportional terms, as the United States, which has been by far the most aggressive in unilaterally challenging Swiss bank secrecy. In stark contrast, the UK is the only OECD country with an exposure comparable to the majority of developing countries - and yet the UK’s response has been puzzling, to say the least (see box).

The evidence shows clearly the broad scale of damage done to development through the financial secrecy provided by tax havens. It is no coincidence that one major difference between the Millennium Development Goals (MDGs) agreed in 2000 and the Sustainable Development Goals (SDGs) agreed in 2015 is the inclusion both of supporting tax and of combating illicit financial flows in the latter. Pressure from developing countries to move past the aid-driven MDG agenda is an important element of this progress.

The material above is extracted and adapted by Third World Resurgence from ’Ending the Era of Tax Havens: Why the UK government must lead the way’ (2016) with the permission of Oxfam GB, Oxfam House, John Smith Drive, Cowley, Oxford OX4 2JY, UK (www.oxfam.org.uk). Oxfam GB does not necessarily endorse any text or activities that accompany the materials, nor has it approved the adapted text. The Oxfam GB briefing paper ’Ending the Era of Tax Havens: Why the UK government must lead the way’ was written by Alex Cobham and Luke Gibson.

TAX dodging encompasses both tax avoidance and illegal tax evasion, both of which minimise the contributions companies and individuals make to society. It is often difficult to distinguish between the two, and there is certainly some tax planning that may be legal according to the letter of the law but that goes against the spirit of the law.

Tax havens are jurisdictions or territories which have intentionally adopted fiscal and legal frameworks that allow non-residents to minimise the amount of taxes they pay where they perform substantial economic activity.

Tax havens tend to specialise, and most of them do not tick all the boxes, but they usually fulfil several of the following criteria:

- They grant fiscal advantages to non-resident individuals or legal entities only, without requiring that substantial economic activity be carried out in the country or dependency.

- They provide a significantly lower effective level of taxation, including zero taxation.

- They have adopted laws or administrative practices that prevent the automatic exchange of information for tax purposes with other governments.

- They have adopted legislative, legal or administrative provisions that allow the non-disclosure of the corporate structure of legal entities (including companies, trusts and foundations) or the ownership of assets or rights.

It is common to make a distinction between ’corporate tax havens’, which adopt particular rules that enable corporations to avoid paying their fair share of tax in other countries, and ’secrecy jurisdictions’, which provide the necessary secrecy for individuals or entities to avoid paying tax. The Tax Justice Network (TJN) defines secrecy jurisdictions as those that enable people or entities to escape the laws, rules and regulations of other jurisdictions, using secrecy as a prime tool. For the purposes of this article, the terms ’secrecy jurisdiction’ and ’tax haven’ are largely used interchangeably.

HSBC, and the UK’s curious ambivalence

IN 2010, the UK government - via Her Majesty’s Revenue and Customs (HMRC) - received from France the HSBC Swiss account data leaked by Herve Falciani (and subsequently part-published by the International Consortium of Investigative Journalists as ’Swiss Leaks’). The same year, the incoming coalition government made the Rev. Stephen Green, former HSBC Group Chief Executive (2003-06), Chair of HSBC Private Banking Holdings (Suisse) SA (2005-10) and HSBC Chairman (2006-10), a member of the House of Lords and appointed him as a trade minister.

In 2011, the UK signed an agreement with Switzerland under which Swiss banks would withhold some taxes on undisclosed accounts held by UK taxpayers and remit them to the UK, whilst maintaining the secrecy of account holders. The deal was criticised by the Tax Justice Network for providing effective immunity for criminals. TJN also published analysis showing that the UK would receive at best a fraction of the revenues promised due to various loopholes.

In February 2015, HMRC told the Public Accounts Committee that from Swiss Leaks data on 6,800 entities, it had identified 1,000 tax evaders but had secured just a single conviction. In the same month, the former public prosecutor Lord Ken MacDonald QC argued that the bank itself should have been considered for criminal prosecution: ’It seems clear, from the evidence we have seen, that there exists credible evidence that HSBC Swiss and/or its employees have engaged over many years in systematic and profitable collusion in serious criminal activity against the exchequers of a number of countries.’

The Public Accounts Committee questioned HSBC’s chief executive Stuart Gulliver. This revealed details about his personal tax status, including that he was non-domiciled in the UK for tax purposes, that he had a Swiss bank account and was previously paid through a Panamanian company, which Gulliver himself acknowledged were further damaging the bank’s reputation. Some MPs blocked an attempt to question Lord Green himself to find out what he knew about the scandal during his time in charge of the bank.

In January 2016, the UK financial regulator, the Financial Conduct Authority (FCA), confirmed to Sky News that it would not pursue HSBC over the tax evasion facilitation highlighted by Swiss Leaks, only a month after announcing its decision to drop its wider review into banking culture. Both decisions were taken while the regulator lacked a permanent chief executive, after the ousting of the ’hardline’ Martin Wheatley, in a move described by the Financial Times as a signal that the government was bringing to an end the post-financial-crisis era of intrusive regulation. In February 2016, HSBC announced its decision to remain in the UK following a review, announced in April 2015, about whether to relocate its headquarters to Hong Kong.

This case raises a number of questions about the UK government’s appetite to tackle tax abuse. Is the UK simply more tolerant of tax evasion than other countries that had less at stake but pursued the criminals and the revenues more vigorously? Did the bank’s economic importance affect its treatment? Do political relationships play a role? Is there a specific HSBC issue at play, or is this merely symptomatic of a wider ’Finance Curse’?

Tax havens ’serve no useful economic purpose’ - economists

AHEAD of the anti-corruption summit organised by the UK government in London on 12 May, over 300 leading economists from 30 countries wrote to world leaders urging action on tax havens. The signatories of the letter, which was coordinated by Oxfam, included Thomas Piketty, author of the bestselling Capital in the Twenty-First Century; Angus Deaton, the current Nobel Prize winner for Economics; Nora Lustig, professor of Latin American Economics at Tulane University; Jeff Sachs, director of Columbia University’s Earth Institute and an adviser to UN Secretary-General Ban Ki-moon; and Olivier Blanchard, former IMF chief economist. Below is the text of the letter.

Dear world leaders,

We urge you to use this month’s anti-corruption summit in London to make significant moves towards ending the era of tax havens.

The existence of tax havens does not add to overall global wealth or well-being; they serve no useful economic purpose. Whilst these jurisdictions undoubtedly benefit some rich individuals and multinational corporations, this benefit is at the expense of others, and they therefore serve to increase inequality.

As the Panama Papers and other recent exposés have revealed, the secrecy provided by tax havens fuels corruption and undermines countries’ ability to collect their fair share of taxes. While all countries are hit by tax dodging, poor countries are proportionately the biggest losers, missing out on at least $170 billion of taxes annually as a result.

As economists, we have very different views on the desirable levels of taxation, be they direct or indirect, personal or corporate. But we are agreed that territories allowing assets to be hidden in shell companies or which encourage profits to be booked by companies that do no business there, are distorting the working of the global economy. By hiding illicit activities and allowing rich individuals and multinational corporations to operate by different rules, they also threaten the rule of law that is a vital ingredient for economic success.

To lift the veil of secrecy surrounding tax havens we need new global agreements on issues such as public country by country reporting, including for tax havens. Governments must also put their own houses in order by ensuring that all the territories for which they are responsible make publicly available information about the real ’beneficial’ owners of companies and trusts. The UK, as host for this summit and as a country that has sovereignty over around a third of the world’s tax havens, is uniquely placed to take a lead.

Taking on the tax havens will not be easy; there are powerful vested interests that benefit from the status quo. But it was Adam Smith who said that the rich ’should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.’ There is no economic justification for allowing the continuation of tax havens which turn that statement on its head.